BarcelonaThe shopping basket is rising at an unusual rate in recent years and this has set off alarms in many sectors of the economy. In recent months, pressure has been on the central banks of major developed economies to take steps to curb sharp price increases, but so far in the eurozone the European Central Bank has paid little heed to the recommendations.
Inflation – the rate of growth in the prices of consumer goods and services – rose by 5.1% in January compared to a year ago in the euro area as a whole, according to provisional data from Eurostat, the EU’s statistical agency. This is an unusual rate following a decade of very moderate price rises and has raised the voice of the countries and sectors most affected by the impact of inflation for the European Central Bank (ECB) to rise. interest rates.
The basic rate – the interest that banks pay to borrow money from the relevant central bank – is the tool that monetary regulators have both to encourage economic growth and to control inflation. An increase in interest rates moderates inflation but at the same time slows growth, as it also makes it more expensive to apply for a bank loan.
At a time of full economic recovery, therefore, the ECB raising interest rates provokes conflicting views on divergent interests. Within the ECB, the German and Central Representatives are the ones who are pushing hardest to raise rates and thus fight price increases. On the other hand, peripheral countries such as Spain and Italy give priority to ensuring a good growth rate, even if it is paying the price of inflation.
“Inflation benefits the most indebted states,” says Jordi Galí, a professor of economics at UPF and a researcher at the Center for Research in International Economics. This explains why peripheral countries, with higher levels of public debt, have little interest in curbing inflation. This benefit occurs because, if prices rise, the value of money decreases over time: the same amount of euros allows you to buy fewer products than before if they have become more expensive. Likewise, the real value of debt is also declining.
In addition to public debt, the savings of families must also be taken into account. According to the OECD, in 2020 the savings of Spanish households were 10.1% of disposable income, while that of German households was 16%. Inflation erodes the value of savings.
“We start with unusually low rates and sooner or later normalization must be done,” explains Galí. As can be seen in the attached graph, in recent years central banks have kept rates close to 0%. This situation has greatly reduced the cost of credit, which has had a direct impact on the accounts of commercial banks, as financial institutions live precisely from collecting interest on the loans they give. It is precisely the banks that are the main lobby, within the private sector, that are most demanding that interest rates be raised.
Despite the pressures, the ECB has so far taken cautious price rises and has not acted very forcefully. The ECB does not plan to raise interest rates “until the end of debt-buying programs,” says Galí. The institution chaired by Christine Lagarde plans to close the special stimulus program launched with the pandemic this March, but will partially offset it with more purchases with its regular program until the end of the year. In addition, the ECB comes “from an unforgettable experience”, Galí recalls, when in 2011 it raised rates to contain inflation and plunged the eurozone economy into a severe recession.
The main reason why the ECB has not done anything to reduce inflation so far is that it considers it “transitory”, in Lagarde’s words, and the direct cause of the rise in energy prices due to geopolitical tensions. and by logistical shortages and collapses as a result of the post-pandemic economic recovery. In fact, in countries like Spain this January prices have already fallen compared to December. If this trend continues, the regulator “will have done well to wait” and not raise rates.
Wages rise in the US
The European debate on inflation is different from the one in the United States, where the Federal Reserve (FED) – the country’s central bank – has already announced rate hikes, all indications are that in March, in the face of price rises stronger than in the eurozone. The reason, Galí analyzes, is that in the US, price increases have resulted in wage increases. The US labor market is “very tense”, with fewer workers, which has pushed up wages.
In the US, then, the reasons behind price rises go beyond the cost of energy, and there is a danger that inflation will rise and enter a spiral of price and wage rises to offset successive losses of purchasing power of workers.
